Weekly Bond Update

European CDS indices have tightened gradually this week

Reduced primary bond issuance in EUR compared with last week

Uncertainty regarding the situation in Syria continues

Market commentary
This week we have seen a gradual tightening of credit indices of approximately 6% since last week’s report for the major CDS-based iTraxx indices. The credit indices tightened gradually until Wednesday, with marginal spread widening yesterday. The past week’s trend is not reflected in cash bonds, which typically lag behind the CDS-based indices. Also note that the iTraxx indices’ semi-annual roll is due next week and tradeable as of Friday, 20 September.

Uncertainty regarding the situation in Syria is evident and the improved investor sentiment could be replaced by volatile hikes, dependent upon the unresolved military action. Resolution of the ongoing UN negotiations to bring Syria’s chemical weapons under international control is uncertain with obvious practical obstacles. A first draft of the UN Security Council indicates a deadline of 15 days post the resolution’s adoption to provide ‘an exhaustive, complete and definite declaration’ of its chemical weapons. The actual timeline and effect is very uncertain but the situation in Syria is likely to influence markets in the months to come.

Verizon Communications (BBB+/A-/Baa1) hit the news earlier this week, as it launched the largest one-time bond offering in history of USD49bn though eight tranches with tenors of three to 30 years. The three-year FRNs were priced at Libor + 153bp and a USD15bn tranche with a 30-year tenor was priced at 30Y US treasury + 265bp. The USD49bn bond issue was significantly above expected levels between USD20bn and USD30bn and a scheduled roadshow in Europe was shelved. As pointed out last week, the bond issue is linked to the announced acquisition of Vodafone’s 45% stake in its joint venture Verizon Wireless for USD130.1bn, of which USD58.9bn is paid in cash and the rest in stocks. The second-largest one-time bond issue in history is now the Apple bond issue of USD17bn issued late in April 2013 through six tranches.

Primary market
We have seen low issuance activity in the EUR market this week dominated by small issues despite the improved market sentiment indication based on CDS indices. We have seen continued issuance from Financials and SSAs albeit with reduced issuance volume compared with last week. Worth mentioning is SEB’s issue of six-year EUR750m at mid-swap +48bp; spreads have widened by 1-2bp in the secondary market since issuance.

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